The Impact of Lease Structures on the Optimal Holding Period for a Commercial Real Estate Portfolio

Charles-Olivier Amédée-Manesme, Michel Baroni, Fabrice Barthélémy () and Mahdi Mokrane
Additional contact information
Charles-Olivier Amédée-Manesme: Department of finance, insurance and real estate - ULaval - Université Laval [Québec]
Michel Baroni: ESSEC Business School
Mahdi Mokrane: LaSalle Investment Management - LaSalle Investment Management

Post-Print from HAL

Abstract: Purpose The purpose of this paper is to exhibit the impacts of lease duration and lease break options on the optimal holding period for a real estate asset or portfolio Methodology / approach We use a Monte Carlo simulation framework to simulate a real estate assets cash-flows in which lease structures (rents indexation patterns overall lease duration and break options) are explicitly taken into account. We assume that a tenant exercises his/her option to break a lease if the rent paid as higher than the market rental value of similar properties. We also model vacancy duration stochastically using Poisson's law. Finally capital values and market rental values are simulated using specific stochastic processes. and are also assumed to be correlated. We derive the optimal holding period for the asset as the value that maximises its discounted value. which is the sum of the discounted free cash flows and the discounted terminal Findings We demonstrate that. consistent with existing capital markets literature and real estate business practice. break-options in leases can dramatically alter optimal holding periods for real estate assets and portfolios by extension. We show that. everything else being equal. shorter lease durations. higher market rental value volatility. increasing negative rental reversion. higher vacancy duration. more break options. all tend to decrease the optimal holding period of a real estate asset. The converse is also true. Practical implications Practitioners are insights as well as a practical methodology for determining the ex-ame optimal holding period for an asset or a portfolio based on a number of market and asset specific parameters including the lease structure. Originality / value The originality of the paper derives from taking an explicit modelling approach to lease duration and lease breaks as additional sources of asset specific risk alongside market risk. This is critical in real estate portfolio management because such specific risk is usually difficult to diversify.

Keywords: Real estate; Portfolio management; Simulation; Optimal holding period (search for similar items in EconPapers)
Date: 2015
Note: View the original document on HAL open archive server: https://essec.hal.science/hal-01070033v1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Property Investment and Finance, 2015, ⟨10.1108/JPIF-02-2014-0010⟩

Downloads: (external link)
https://essec.hal.science/hal-01070033v1/document (application/pdf)

Related works:
Journal Article: The impact of lease structures on the optimal holding period for a commercial real estate portfolio (2015)
Working Paper: The Impact of Lease Structures on the Optimal Holding Period for a Commercial Real Estate Portfolio (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01070033

DOI: 10.1108/JPIF-02-2014-0010

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().